With its recent acquisition of HD Supply, US buyout firm Clayton Dubilier & Rice was following a well-trodden path. Following on from its previous investments in the sector, the firm is developing an expertise in buying and running distribution businesses that few of its competitors can match.
The deal saw CD&R team up with The Carlyle Group and Bain Capital to pay $10.3 billion for HD Supply, the wholesale distribution business of Home Depot, the world’s largest home improvement retailer.
It was also the latest in a string of deals the firm has made in this sector, which also include electrical product distribution firms Rexel and Wesco. Novak, who was responsible for the firm’s investment in Rexel, led the HD Supply deal even though it was based in the US. “We have a lot of experience in distribution businesses,” he said. “Plus we are a small team operating a global fund, so we can pick the people who are best qualified for the job.”
This experience enabled CD&R to steal a march on other potential buyers. “The near miss with Hughes Supply, allied to our detailed sector knowledge, enabled us to take a more bullish view on HD Supply’s prospects and on what we can do with the management team,” added Novak.
HD Supply is a classic CD&R deal, he said. “It’s a non-core distribution asset, with a broad spread of risk, more than 500,000 products and approximately 500,000 active customers. It is the number two in its market in the US. And it’s a great opportunity for operational improvement.”
After successfully operating a number of similar business, the CD&R approach is now firmly established. “We can integrate HD’s significant acquisition spree, implement best practice, improve sourcing and pricing, and invest in IT,” Novak said.
The firm’s track record in the sector is so good that it is no wonder its consortium partners wanted to join forces. Novak is confident that the combination will be an effective one, even though the three groups have never worked as a trio before. “I am optimistic it will work,” he said. “We have worked with Carlyle on Hertz, while Bain is an attractive partner on this deal because of its experience in distribution.”
However, sources suggest that CD&R will provide the bulk of the experience, and is likely to appoint one of its operating partners as chairman of the HD Supply board.
The $10 billion deal will involve a $2 billion equity cheque, which will be spread equally between the three buyers. The debt financing package will include a covenant-lite loan arranged by Merrill Lynch, JP Morgan and Lehman Brothers, and will be valued at just over 8 times the company’s 2006 earnings.
So what next for the US firm – more of the same? “We will clearly be digesting this. But the pipeline is robust. Don’t expect to see any surprises.”
The firm is now about three quarters of the way through its fund, suggesting that its next round of fundraising may be imminent. Novak would not be drawn on timeframes, however. “We’ll be fundraising at some point,” he would only say.